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Arco Reports Second Quarter 2022 Results

·10-min read

Arco Delivers R$412.1 Million in Revenues in 2Q22, a 61% Increase Versus 2Q21

SÃO PAULO, Brazil, August 18, 2022--(BUSINESS WIRE)--Arco Platform Limited, or Arco or Company (Nasdaq: ARCE), today reported financial and operating results for the second quarter ended June 30, 2022.

"The resumption of in-person classes in the Brazilian private K-12 segment and consequent return of students who dropped-out during the pandemic led to great enthusiasm inside our partner schools. The significant increase in additional orders of our ACV bookings impacted our revenue recognition seasonality, as part of the books typically delivered in Q1 were delivered in April instead and, as a result, 2Q22 had a stronger top line. Looking at the broader picture, we have already recognized 83.2% of the ACV bookings for the 2022 cycle and we are confident that we will recognize 100% by Q3. Our integration and efficiency agenda is progressing well, and initial results can be observed in all lines, from costs and expenses to working capital and capex. As for the commercial cycle for 2023, although still early - the strongest months for new contracts are typically September, October, and November -, our ability to attend and promote in-person events and visit our partner schools has proven to be an extremely powerful tool to retain our partner schools and convert leads developed in prior cycles."

Ari de Sá Neto, CEO and founder

2Q22

6M22

Net Revenue

Gross Profit

Net Revenue

Gross Profit

R$412.1M

R$279.1M

R$842.2M

R$592.5M

Adj. EBITDA¹

Adj. Net Income²

Adj. EBITDA¹

Adj. Net Income²

R$110.7M

R$(23.2)M

R$257.3M

R$8.1M

1) Please see Adjusted EBITDA Reconciliation on page 17. 2) Please see Adjusted Net Income Reconciliation on pages 17 and 18.

Financial Highlights

Net revenue for the second quarter was R$412.1 million, a 61% year-over-year (YoY) increase, representing a 26.4% revenue recognition of 2022 ACV bookings. Core solutions totaled R$367.3 million (+83% YoY), while Supplemental solutions were R$44.8 million (-20% YoY) as most of the revenue recognition for this segment takes place in Q4 (cycle-to-date 82.7% of the Supplemental solutions’ ACV has already been recognized). For the first six months of 2022, net revenue increased 43% year-over-year to R$842.2 million, with Core solutions increasing 54% to R$713.5 million and Supplemental solutions increasing 4% to R$128.7 million. Excluding recent M&A1, net revenue increased 47% YoY in 2Q22 and 31% in 6M22 YoY. On a cycle-to-date (CTD) perspective, Arco already recognized 83.2% of the 2022 ACV and is confident that will be able to recognize 100% by Q3.

The positive effects of our integration and efficiency agenda were crucial to partially offset non-recurring increase in operating costs (content providing and freight) resulting from late orders, as rush printing costs are on average 25% higher than regular printing costs and books were shipped under express tariffs and through more expensive shipping methods (air, dedicated trucks). As a result, gross margin in 2Q22 was 67.7% (vs 73.4% in 2Q21). When excluding depreciation and amortization, cash gross margin was 75.8% for the same period (vs. 78.1% in 2Q21). For the 6 months of 2022, gross margin was 70.4% (vs 73.6% in 6M21) and cash gross margin was 77.4% (vs 78.4% in 6M21). Excluding those non-recurring impacts and recent M&A¹, cash gross margin for 6M22 would be 80.9%.

Higher selling expenses excluding depreciation and amortization at R$147.4 million in 2Q22 (+54% YoY) and R$285.3 million (+50% YoY) in the first six months of 2022 reflect higher investments in commercial activities (identifying and developing leads and cross sell opportunities, intensifying pedagogical support to partner schools, resumption of in-person interactions and events, etc), which are crucial to foster the strong growth potential opportunities and to capture more market share over time in both Core and Supplemental segments, as well as higher inflation for the period (mainly impacting travel expenses). Excluding recent M&A1, selling expenses increased 50% in 2Q22 and 44% in 6M22. Due to the diligent cash collection process and close relationship with partner schools, Arco was able to improve the quality of its receivables, resulting in a consistent reduction of allowance for doubtful accounts (-106% YoY in 2Q22, -163% YoY in 6M22).

Allowance for doubtful accounts (R$M)

2Q22

2Q21

YoY

1Q22

QoQ

6M22

6M21

YoY

Allowance for doubtful accounts

0.4

(6.6)

-106%

6.2

-94%

6.6

(10.5)

-163%

% of net revenues

0.1%

-2.6%

2.7 p.p.

1.4%

-1.3 p.p.

0.8%

-1.8%

2.6 p.p.

General & administrative expenses (G&A) continue to show the results of a more integrated back-office strategy. In 2Q22, G&A expenses excluding depreciation and amortization were R$66.0 million (+28% YoY) and represented 16% of net revenue (versus 20% in 2Q21). Excluding recent M&A¹ G&A expenses increased to R$62.9 million (+25% YoY) in 2Q22. Share-based compensation plan increased 3% in 2Q22 YoY. For the first six months of 2022, G&A expenses excluding depreciation and amortization were R$138.6 million (+16% YoY) and represented 17% of net revenue (versus 20% in 6M21). Excluding the effects of recent M&A¹, G&A expenses increased 7% YoY in 6M22 to R$126.5 million.

___________________________________

1 Recent M&As refer to businesses acquired in 2021 (Me Salva, Eduqo, Edupass, COC, Dom Bosco) and 2022 (PGS, Mentes).

Adjusted EBITDA was R$110.7 million in 2Q22 (+53% YoY), with an adjusted EBITDA margin of 26.9% (versus 28.2% in 2Q21). Despite temporarily lower cash gross margin in 2Q22 (-2.3 p.p. YoY), adjusted EBTIDA was positively impacted by G&A efficiencies (+4.1 p.p. YoY). As for the first six months of 2022, adjusted EBITDA increased 35% YoY to R$257.3 million, and adjusted EBTIDA margin was 30.6% (versus 32.4% in 6M21). Excluding the one-off impact from late orders, adjusted EBITDA margin was 31.4% in 2Q22 and 33.2% in 6M22. We expect the adjusted EBITDA margin to be within the 36.5% and 38.5% guidance range by the end of 2022.

Arco presented an adjusted net income (loss) in 2Q22 of R$(23.2) million and adjusted net margin of -5.6% (-14p.p. YoY), impacted by higher finance expenses and D&A. For the six-month period of 2022, adjusted net income was R$8.1 million, with an adjusted net margin of 1.0% (versus 13.0% in 6M21).

From a cycle perspective, 48% revenue growth CTD (35% excluding M&A) is consistent with the robust volume of ACV bookings announced for the 2022 commercial cycle. Efficiency improvements also demonstrate the initial results of our integration strategy, delivering 52% adjusted EBITDA growth and a 1p.p. adjusted EBITDA margin growth versus 2021 CTD (2.7 p.p. growth excluding one-off impact of late orders).

A solid cash collection process led to an important improvement in the quality of accounts receivable, with reduced days sales outstanding - DSO (141 days in 2Q22 from 212 days in 1Q22) and delinquency levels (5.6% in 2Q22 from 10.0% in 2Q21). In 2Q22, R$519 million of receivables were collected, 30% above the R$400 million estimated for the 2Q22 at 1Q22 earnings result.

Days of sales outstanding

2Q22

2Q21

YoY

1Q22

QoQ

6M22

6M21

YoY

Trade receivables (R$M)

687.6

477.7

44%

887.1

-22%

687.6

477.7

44%

(-) Allowance for doubtful accounts

(79.7)

(71.3)

12%

(80.9)

-1%

(79.7)

(71.3)

12%

Trade receivables, net (R$M)

607.8

406.4

50%

806.2

-25%

607.8

406.4

50%

Net revenue LTM pro-forma¹

1,568.9

1,118.6

40%

1,387.3

13%

1,568.9

1,118.6

40%

Adjusted DSO

141

133

7%

212

-33%

141

133

7%

1) Calculated as net revenues for the last twelve months added to the pro forma revenues from businesses acquired in the period to accurately reflect the Company’s operations.

CAPEX in 2Q22 was R$43.2 million, a 9.6% increase YoY and 10.5% of net revenue (versus 15.4% in 2Q21). For 6M22 CAPEX totaled R$90.2 million, down 210 bps YoY to 10.7% of net revenue (versus 12.8% in 6M21), within the guidance range of 10% to 12% of revenues for 2022 full year.

CAPEX (R$M)

2Q22

2Q21

YoY

1Q22

QoQ

6M22

6M21

YoY

Acquisition of intangible assets¹

41.5

36.8

13%

40.3

3%

81.8

69.6

18%

Educational platform - content development

4.5

1.3

246%

3.9

15%

8.4

18.3

-54%

Educational platform - platforms & tech

17.9

19.7

-9%

24.6

-27%

42.5

27.1

57%

Software

16.5

13.8

20%

10.3

60%

26.8

19.6

37%

Copyrights and others

2.6

2.1

24%

1.5

73%

4.1

4.7

-13%

Acquisition of PP&E

1.7

2.5

-32%

6.7

-75%

8.4

5.5

53%

TOTAL¹

43.2

39.4

10%

47.0

-8%

90.2

75.1

20%

1) Excludes R$14.2 million related to M&A payments (PGS’ and Mentes’ acquisition, being R$5.5 million in 1Q22 and R$8.7 million in 2Q22) from the accounting CAPEX of R$52.0 million for 2Q22 and R$104.5 million for 6M22.

Cash from operations for 2Q22 and 6M22 highlights a better cash generation profile versus previous years. In 2Q22 cash from operations increased to R$191.6 million, from R$113.2 million in 2Q21, representing 173.1% of the 2Q22 adjusted EBITDA (+16.5 p.p. versus 156.6% of the 2Q21 adjusted EBITDA). Adjusted free cash flow2 in 2Q22 increased to R$89.5 million, from R$64.10 million in 2Q21, representing 80.9% of the 2Q22 adjusted EBITDA (-7.8 p.p. versus 88.7% of the 2Q21 adjusted EBITDA). For the six-month period ended June 30, 2022, cash from operations increased to R$294.3 million, from R$202.4 million in 6M21, representing 114.4% of 6M22 adjusted EBITDA (+8.2 p.p. versus 106.2% of 6M21 adjusted EBITDA). Even in a scenario of rising interest rates, adjusted free cash flow grew 38% YoY in 6M22, representing 33.2% of the 6M22 adjusted EBITDA versus 32.5% in 6M21.

Arco’s corporate restructuring is ongoing. In May 2022 Arco concluded the incorporation of COC and Dom Bosco into CBE (Companhia Brasileira de Educação e Sistemas de Ensino, Arco’s wholly-owned entity which incorporates acquired businesses), leading to estimated future annual income tax savings of approximately R$12 million. Additionally, in June, Arco completed the acquisition of the remaining 42.6% stake in Geekie for R$223.9 million and its incorporation is in progress with conclusion expected for 4Q22. Future incorporations include SAE Digital (2023), Pleno (2023) and Escola da Inteligência (2023). As we keep incorporating other businesses into CBE, we expect to capture additional tax benefits and therefore further reduce our effective tax rate, currently at 10% in 6M22 (versus 19% in 6M21).

Intangible assets - net balances (R$M)

2Q22

2Q21

YoY

1Q22

QoQ

6M22

6M21

YoY

Business Combination

2,949.9

2,374.1

24%

2,977.8

-1%

2,949.9

2,374.1

24%

Trademarks

488.8

443.0

10%

495.2

-1%

488.8

443.0

10%

Customer relationships

255.8

266.8

-4%

265.5

-4%

255.8

266.8

-4%

Educational system

224.6

216.4

4%

233.9

-4%

224.6

216.4

4%

Softwares

8.6

7.3

18%

10.3

-17%

8.6

7.3

18%

Educational platform

4.4

6.0

-27%

4.1

7%

4.4

6

-27%

Others¹

16.8

15.9

6%

19.0

-11%

16.8

15.9

6%

Goodwill

1,950.9

1,418.7

38%

1,949.9

0%

1,950.9

1,418.7

38%

Operational

288.1

193.0

49%

276.1

4%

288.1

193.0

49%

Educational platform²

200.1

136.0

47%

198.3

1%

200.1

136.0

47%

Softwares

77.1

45.3

70%

66.8

15%

77.1

45.3

70%

Copyrights

10.8

11.7

-8%

11.0

-2%

10.8

11.7

-8%

Customer relationships

0.1

0.1

-100%

0.1

0%

0.1

0.1

-100%

TOTAL

3,238.0

2,567.1

26%

3,253.9

0%

3,238.0

2,567.1

26%

1) Non-compete agreements and rights on contracts. 2) Includes content development in progress.

Amortization of intangible assets (R$M)

2Q22

2Q21

YoY

1Q22

QoQ

6M22

6M21

YoY

Business Combination

(73.5)

(55.0)

34%

(60.4)

22%

(133.8)

(110.0)

22%

Trademarks

(8.0)

(6.4)

25%

(7.7)

4%

(15.7)

(12.8)

23%

Customer relationships

(9.4)

(8.5)

11%

(9.2)

2%

(18.5)

(17.0)

9%

Educational system

(9.4)

(8.1)

16%

(9.3)

1%

(18.7)

(16.1)

16%

Softwares

(0.7)

(0.6)

17%

(0.7)

0%

(1.4)

(1.2)

17%

Educational platform

(0.2)

(0.2)

0%

(0.2)

0%

(0.5)

(0.4)

25%

Others¹

(1.5)

(1.2)

25%

(1.4)

7%

(2.8)

(2.3)

22%

Goodwill

(44.3)

(30.1)

47%

(31.9)

39%